Two data points released on Wednesday has again brought the
specter of stagflation in India to the fore.
The rise in food prices and telecom tariffs pushed the retail
inflation in January 2020 to 7.59%, the highest level seen since May 2014. At
the same time the industrial production recorded a decline of 0.3% in December
2019.
I agree with the viewpoint that at macro level we may not be
facing any threat of stagflation in near term. I also believe that (a) the
headline CPI number may be close to peaking and may ease considerably post
summer, as estimated by the monetary policy committee (MPC) of RBI; and (b) the
headline growth number may be close to bottom and we may see a gradual recovery
from 2HFY21 onwards.
Notwithstanding the macro viewpoint, it is pertinent to keep in
mind that a large segment of the population may already be experiencing
stagflationary conditions.
- There is no denying that the employment conditions have worsened in past one decade and there is no hint available that this trend will reverse anytime soon. The labor participation rate in 2019 was lowest
- The real wage rate growth for agriculture labor that forms a major part of overall workforce have been consistently declining since summer of 2017 and have seen de-growth in 2019. This could be due to significant rise in MSP of main crops over past two years. But nonetheless, the rural inflation has been consistently higher than the urban inflation while the rural wages have not seen commensurate growth.
- Latest rounds of consumer confidence survey conducted by RBI clearly indicate that more households across major cities in India have seen their income decrease than increase in past one year. Moreover, majority of households perceive that employment outlook in India has sharply deteriorated. (for more details see here)In my view therefore it would not be fair to assume that a large segment of Indian population is experiencing stagflationary conditions and this situation is likely to last for many quarters to come.
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